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These transfer cases are pretty solid for a daily driver. You had a bearing seize up and that big ass chain ripped the housing in two. Doo not drive around in 2wd mode as you will suffer a worse fate when the rest of that case fails and destroys the back half of your trans. A new transfer case is 1k or way cheaper at a bone yard. That's a rough way to come into this forum. They are easy to rebuild if you find a cheap one that needs freshened up, only need a couple tools to tear them completely down.
 
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Well NOW I know that! 馃槀
If you have the means to notch out the transmission support you can run a one piece driveshaft up front. I haven't done this yet and just rebuilt the cardan joint a few weeks ago. I should have done it.
 

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"The chain and both sprockets keep spinning." I thought that looked like the lower chain sprocket in the picture and it didn't look like there is any disconnect between the sprocket and the shaft. So my next guess is... the later models with CAD only disconnects one axle and the other axle still spins the spiders and the inner shaft on the other side. In other words, it's less resistance to spin the spiders and stub shaft than to spin the front drive shaft and TC sprockets and chain.
That makes unlocking hubs look WAY more necessary and not just a luxury! I'm 69 and if I live long enough to need bearing hubs again, they will be unlocking.
There is a gear on the main shaft of the transfer case that the servo moves into place to lock into 4wd. When not in 4wd the entire front end spins including the drive shaft, front output shaft of the transfer case and the chain drive. I think that is what your were referring to, if not then I digress.
 

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Freespin kit means you won't have to grease that front driveshaft ever. And keeps your transfer case in one piece. But those who are good about maintenance and rebuild things as needed (like I do) can save the money on a freespin kit and spend it on parts and labor instead. My point is it's all a tradeoff, pick which one fits your needs and go with it.
 
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